2000, Independent Electricity Market Operator All Rights Reserved 1

2000, Independent Electricity Market Operator All Rights Reserved 2 Physical Bilateral Contracts in the IMO Administered Markets Ontario Standard Physical Bilateral Contract Drafting Committee Jack Lubek - IMONovember 22, 2000 Ontario Standard Physical Bilateral Contract Drafting Committee Jack Lubek - IMONovember 22, 2000

2000, Independent Electricity Market Operator All Rights Reserved 3 What is a Physical Bilateral Contract? Energy Suppliers Energy Purchasers MWMW IMO - Administered Markets Markets Energy Market No Contract Settlement for all energy is through the IMO $$ Contract or no contract Energy is still supplied and withdrawn from the IMO market via offers to sell and bids to buy

2000, Independent Electricity Market Operator All Rights Reserved 4 Physical Bilateral Contract Settlement for energy quantities specified in the contract is between the supplier and purchaser What is a Physical Bilateral Contract? Energy Suppliers Energy Purchasers MWMW IMO - Administered Markets Markets Energy Market $ Contract or no contract Energy is still supplied and withdrawn from the IMO market via offers to sell and bids to buy

2000, Independent Electricity Market Operator All Rights Reserved 5 Timing for Settlement Purposes DispatchDay 7Days Initial submission and revisions No earlier than 7 days prior to dispatch dayNo earlier than 7 days prior to dispatch day Within 6 business days after dispatch dayWithin 6 business days after dispatch day 6BusinessDays

2000, Independent Electricity Market Operator All Rights Reserved 6 Settlement of Physical Bilateral Contracts IMO charges Load A for 80 MWh at MCPIMO charges Load A for 80 MWh at MCP Load A pays Gen 1 directly for 45 MWh at bilateral priceLoad A pays Gen 1 directly for 45 MWh at bilateral price IMO pays Gen 1 for = 55 MWh at MCPIMO pays Gen 1 for = 55 MWh at MCP Physical Bilateral Agreement for 45 MW Generator 1 Load A Injects 100 MW Withdraws 80 MW IMO - Administered Markets Markets Energy Market IMO pays Load A for 45 MWh at MCPIMO pays Load A for 45 MWh at MCP

2000, Independent Electricity Market Operator All Rights Reserved 7 Intertie Settlement of Physical Bilateral Contracts - 1 IMO charges Load A for 80 MWh at MCP $20IMO charges Load A for 80 MWh at MCP $20 Load A pays Supplier 1 directly for 45 MWh at bilateral priceLoad A pays Supplier 1 directly for 45 MWh at bilateral price IMO pays Supplier 1 for = 55 MWh at Intertie Zone MCP $18IMO pays Supplier 1 for = 55 MWh at Intertie Zone MCP $18 Physical Bilateral Agreement for 45 MW Supplier 1 Load A Imports 100 MW Withdraws 80 MW IMO - Administered Markets Markets Energy Market IMO pays Load A for 45 MWh at Intertie Zone MCP $18IMO pays Load A for 45 MWh at Intertie Zone MCP $18 Intertie Zone MCP $18 Ontario MCP $20

2000, Independent Electricity Market Operator All Rights Reserved 8 Intertie Settlement of Physical Bilateral Contracts - 2 IMO charges Load A for = 35 MWh at MCP $20IMO charges Load A for = 35 MWh at MCP $20 IMO charges Supplier 1 for 45 MWh at MCP $20IMO charges Supplier 1 for 45 MWh at MCP $20 Load A pays Supplier 1 directly for 45 MWh at bilateral priceLoad A pays Supplier 1 directly for 45 MWh at bilateral price IMO pays Supplier 1 for 100 MWh at Intertie Zone MCP $18IMO pays Supplier 1 for 100 MWh at Intertie Zone MCP $18 Physical Bilateral Agreement for 45 MW Supplier 1 Load A Imports 100 MW Withdraws 80 MW IMO - Administered Markets Markets Energy Market Intertie Zone MCP $18 Ontario MCP $20

2000, Independent Electricity Market Operator All Rights Reserved 9 Another Settlement Example IMO charges Load A for 80 MWh at MCPIMO charges Load A for 80 MWh at MCP Load A pays Gen 1 directly for 45 MWh at bilateral priceLoad A pays Gen 1 directly for 45 MWh at bilateral price Gen 1 pays IMO for 45 MWh at MCPGen 1 pays IMO for 45 MWh at MCP IMO Pays Load A for 45 MWh at MCPIMO Pays Load A for 45 MWh at MCP Physical Bilateral Agreement for 45 MW Generator 1 Load A Not dispatched Withdraws 80 MW IMO - Administered Markets Markets Energy Market

2000, Independent Electricity Market Operator All Rights Reserved 10 Standard Bilateral Contract Physical or Financial? Overview What is a physical bilateral contract (PBC) in the IMO-administered markets (IAM) ? Does a physical contract between participants work with the IMO PBC? Are financial contracts between participants sufficient to deal with all arrangements which may emerge?

2000, Independent Electricity Market Operator All Rights Reserved 11 What is the IMO Physical Bilateral Contract Market rules describe the PBC primarily in terms of the settlement adjustmentsMarket rules describe the PBC primarily in terms of the settlement adjustments Energy quantities are removed from spot market settlement, at the purchaser location, as specified in the PBC dataEnergy quantities are removed from spot market settlement, at the purchaser location, as specified in the PBC data Settlement for energy quantities specified in their contract is between the supplier and purchaserSettlement for energy quantities specified in their contract is between the supplier and purchaser In this light the PBC:In this light the PBC: is just a settlement adjustment;is just a settlement adjustment; but one might also describe it as a transaction between the two parties, settled outside the spot market, and requiring adjustments (buying and selling) in the spot market for deviations from contracted amounts.but one might also describe it as a transaction between the two parties, settled outside the spot market, and requiring adjustments (buying and selling) in the spot market for deviations from contracted amounts. Market rules describe the PBC primarily in terms of the settlement adjustmentsMarket rules describe the PBC primarily in terms of the settlement adjustments Energy quantities are removed from spot market settlement, at the purchaser location, as specified in the PBC dataEnergy quantities are removed from spot market settlement, at the purchaser location, as specified in the PBC data Settlement for energy quantities specified in their contract is between the supplier and purchaserSettlement for energy quantities specified in their contract is between the supplier and purchaser In this light the PBC:In this light the PBC: is just a settlement adjustment;is just a settlement adjustment; but one might also describe it as a transaction between the two parties, settled outside the spot market, and requiring adjustments (buying and selling) in the spot market for deviations from contracted amounts.but one might also describe it as a transaction between the two parties, settled outside the spot market, and requiring adjustments (buying and selling) in the spot market for deviations from contracted amounts.

2000, Independent Electricity Market Operator All Rights Reserved 12 What is a Physical Contract If by physical contract we mean US style transactions with OASIS purchase / reservation of firm or non-firm transmission access scheduling of the contracted energy injection and withdrawal quantities as part of the ISO (or other) hour or day-ahead scheduling process then the IMO PBC is not physical these actions are not required or even possible in the IMO

2000, Independent Electricity Market Operator All Rights Reserved 13 What is a Physical Contract If you view a physical contract as the only type which supports delivery guarantees delivery is never guaranteed even to a physical contract if there is a local shortfall of generation and/or transmission supply to an area, there is some form of pro- rata or other sharing (curtailment or rotational load shedding) IMO PBC mechanism does not affect the priority / access to transmission

2000, Independent Electricity Market Operator All Rights Reserved 14 Does a Physical Contract Work? Current sample contract (EEI) is not compatible with IMO PBC mechanism with its references to arranging transmission, scheduling and purchasing of ancillary services delivery in contract may not be consistent with notions of delivery in the IMO market These terms need to be redefined to fit corresponding IMO notions e.g. scheduling must include submission of PBC data to IMO, and may optionally refer to bids / offers into the IMO

2000, Independent Electricity Market Operator All Rights Reserved 15 Are Financial Contracts Adequate? Financial contracts can achieve same results as any physical contract (L. Ruff and others) But if too simple the standard financial contract may not go far enough to deal with: a purchase equivalent to the buyers load inter-jurisdictional trade where physical contracts are used in the other jurisdiction Green power

2000, Independent Electricity Market Operator All Rights Reserved 16 Summary IMO PBC is most commonly viewed as a settlement adjustment Some common notions in physical contract are not compatible with IMO market, and would need to be modified A financial contract is compatible, but needs to address options / concerns which are physical

2000, Independent Electricity Market Operator All Rights Reserved 17